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A Bigger Reward in Buying and Holding

Don't be misled by single-digit dividend yields. A low rate today can become a sizable return years from now.

June 01, 2004|Tom Petruno | Times Staff Writer

Despite some hefty percentage increases in corporate dividend payments over the last year, the annualized dividend yields on most stocks remain in the low single digits.

But investment advisors say those yields can be misleading: Because dividends can rise over time -- unlike the interest on a bond, which is fixed for the life of the bond -- a low stock dividend yield today can turn into a much more significant return later for buy-and-hold investors.

The dividend yields of most blue-chip stocks are between 0.5% and 4%. The average is 1.7%. The yield is calculated by dividing the annual dividend by the stock price.

Insurance company Allstate Corp., for example, pays a quarterly dividend of 28 cents a share, or $1.12 total each year. With the stock at $43.98 on Friday, the dividend yield is 2.5% for an investor buying at that price.

Allstate has raised its dividend every year since going public in 1993. The annual dividend started out at 18 cents a share that year. For investors who bought Allstate at its offering price of $13.50 a share in 1993 and held on, the current annual dividend of $1.12 a share provides a yield of 8.3% on the original shares.

With last year's federal tax cut on dividend income, the take-home amounts on dividends received can be substantial, said Joseph Keating, chief investment officer at AmSouth Bancorp in Birmingham, Ala.

That's why his firm, in its money management operations, is "putting greater emphasis on stocks that have a long-run history of paying dividends and that also have the potential to boost payouts from current levels," Keating said.

"We're looking for a growing stream of tax-advantaged income," he said. Stocks that have made his list include Bank of America Corp., Coca-Cola Co., May Department Stores Co., United Technologies Corp. and Johnson Controls Inc.

Rick Keller, head of Keller Group Investment Management in Irvine, said his firm, too, has become more interested in dividend-paying stocks for clients. He said investors should consider fast-growing companies that may not pay much in dividends now but have the ability to pay much more.

Keller said he would include firms such as Microsoft Corp., Qualcomm Inc. and Goldman Sachs Group in that category.

Investors may not think much of dividend yields at current levels, but if stock price appreciation is harder to come by over the next few years -- or if stocks slump anew -- dividend income will take on greater importance in investors' portfolios, Keller said.

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